27. Blockchain trilemma – explanation of the problem. What is the impact on cryptocurrency payments?

Blockchains represent an innovative way to store data, enabling secure and decentralized transactions. However, despite their revolutionary advantages, the technology faces various challenges related to three key areas: security, scalability, and decentralization.

In the context of the “blockchain trilemma”, it becomes almost clear that achieving a balance between these three aspects is a crucial but not easy task.

Security, a priority in the field of information storage, requires the use of advanced cryptographic algorithms. However, this can negatively affect scalability. The push for maximum decentralization, on the other hand, can lead to performance and scalability issues, making it difficult to manage transactions efficiently.

In today’s lesson, we will take a closer look at what the blockchain trilemma issue is and how it can be solved!

What is a blockchain trilemma? Explanation of the problem.

The origin of the term “blockchain trilemma” is attributed to the co-founder of Ethereum, Vitalik Buterin. It refers to the challenges developers face in creating the entire blockchain architecture, which must be secure, scalable, and decentralized simultaneously.

To better understand this, let’s use the example of Bitcoin. The Bitcoin network is currently considered the most secure in the world, achieving extremely fast hashing rates (over 460 Exahash per second). Almost no known computer would be able to break this security based entirely on a mechanism of proof-of-work. In addition, with thousands of independent node operators around the world, the network maintains its decentralized nature, making it more difficult to attack.

However, when it comes to transactions, Bitcoin has limitations. The core layer of Bitcoin hardly seems scalable, handling only about 7 transactions per second (TPS). Any attempt to increase this number could lead to compromises in security, decentralization, or both.

All blockchains face similar challenges, excelling in some areas but facing difficulties in others. Striving to achieve a balance between these three key elements becomes a challenge that requires constant research, innovation, and improvement in blockchain technology.

By developing cutting-edge solutions, blockchain technology can aspire to create systems that combine a high level of security, scalability, and satisfactory decentralization, contributing to the development of the cryptocurrency sector.

Blockchain trilemma – three foundations of blockchain technology

To know what the blockchain trilemma is all about, it is necessary to know the three key pillars of this technology: security, scalability and decentralization. So get to it!

Security

In the context of blockchains, security is crucial. If an attacker can manipulate the data on the ledger, the loss of full integrity renders it unreliable and worthless.

Decentralization is a key element that ensures the security of blockchains, making attacks more difficult in practice. However, achieving a high level of security is a challenge for a system without a central control point, as protection cannot be concentrated in the hands of an individual or organization.

An example of the most popular attack on a blockchain may be the 51% attack, where taking control of most nodes allows the attacker to manipulate the ledger. In the past, Ethereum Classic unfortunately fell victim to this attack.

However, while security is key, it remains tied to the other two aspects of the blockchain trilemma: scalability and decentralization. Increasing security often goes hand in hand with reducing the other elements.

Scalability

Scalability is the ability of a given blockchain to handle a large number of transactions without compromising speed, efficiency, or fees. Blockchain technology must, therefore, meet the challenges of handling increasing numbers of users and transactions. However, achieving scalability while maintaining decentralization and security is a significant challenge.

As with security, increasing scalability can lead to decreased security and decentralization of the blockchain.

Decentralization

Decentralization makes blockchains different from other forms of data storage. Instead of collecting information on a single server controlled by individual owners, blockchains use distributed ledger technology (DLT). Data is stored on multiple servers in different locations around the world, often operated by independent individuals.

Decentralization can strengthen security by eliminating a single point of failure or attack vector. However, as you’ve guessed, over time, improving decentralization can negatively impact security and scalability.

Solutions that indirectly solve the blockchain trilemma problem

To address the blockchain trilemma, which involves addressing security, scalability, and decentralization simultaneously, several solutions have been proposed that make changes at both the Layer 1 (core network) level and through the use of tools at Layer 2.

Proposed Layer 1 Solutions:

The first solution involves improving the consensus layer. This concept aims to change the consensus mechanism on which the network is based. An example of such a change is the shift from a proof-of-work (PoW) consensus to a proof-of-stake (PoS) model, as seen in Ethereum’s update known as “The Merge”. In the PoS model, validation nodes lock or stake tokens for a specified period instead of performing energy-intensive calculations.

Another proposal is sharding, which involves dividing a blockchain into smaller chunks stored in different locations. With sharding, each node no longer needs to store a full set of data, enhancing the ability to process transactions simultaneously and resulting in greater scalability.

Proposed Tier 2 solutions

Many popular proposals to address the blockchain trilemma primarily focus on layer two solutions, aiming to increase scalability while maintaining the decentralization and security of the main chain.

Proposed Layer 2 Solutions:

The first proposal involves nested blockchains, where the main chain manages tasks and controls parameters, while secondary chains process transactions. An example is OMG Plasma.

The second solution is state channels, allowing participants to make transactions off the main chain, with the base layer serving as the ultimate arbiter of transactions. Transactions occur outside the chain, and the channel is closed after direct settlement at the base layer. An example is Bitcoin’s Lightning Network.

The last proposed solution is side chains, acting as independent blockchains running in parallel with the base layer. They use their own consensus mechanisms, providing even greater scalability. However, one challenge with side chains is that they do not rely on base layer security, introducing potential risks. Projects like Polygon, Polkadot, Cosmos, and Avalanche utilize sidechains in their operations.

Summary

The cryptocurrency community is continually working to solve the trilemma, aiming to reach a consensus on a combination of decentralization, scalability, and security. 

This is particularly evident in the field of cryptocurrency payments. However, the future looks very promising. 

Complete today’s lesson!

1. What is a lightning network and how does it work?
2. Interoperability in the world of cryptocurrencies and blockchain.
3. What is blockchain sharding?
4. What is a 51% attack on blockchain?
5. Scalability of blockchain technology – what is it?